CFGIowa Monthly Economic Update July 2013

THE MONTH IN BRIEF

At the closing bell on July 31, the S&P 500 settled at 1,685.73 thanks to a 4.95% monthly gain – another triumph for a bull market that has overcome a host of challenges. This striking July advance came even as fundamental economic indicators sent mixed messages. The Federal Reserve said nothing definite about when it would taper QE3 (Quantitative Easing). Overseas, there were hints of a slightly better economic picture in Europe, contradictory signals out of China, and numerous stock market advances.1

DOMESTIC ECONOMIC HEALTH

July offered both encouraging and discouraging economic statistics. The Institute for Supply Management’s July PMIs seemed to show an economy gaining traction. ISM’s manufacturing PMI (Purchasing Managers Index) leapt to 55.4 compared to 50.9 in June, and its service sector PMI jumped to 56.0 from the previous 52.2. The Commerce Department said that consumer spending was up 0.5% in June, corresponding to the projections of economists surveyed by Reuters; consumer incomes rose another 0.3 on the heels of a 0.4% improvement in May. Unemployment declined to 7.4% in July, but the pace of hiring also declined. Non-farm payrolls expanded by 162,000 jobs (compared to 188,000 in June), with retail, bar and restaurant positions representing much of the additions. Durable goods orders had increased 4.2% in June, but they were flat with the volatile transportation category removed. As the quarter ended, the federal government issued its first estimate of Q2 GDP (Gross Domestic Product): 1.7%, indicative of the economy’s slow comeback.2,3,4,5,6

July also offered a mixed picture of consumer confidence. The Conference Board’s July poll came in at 80.3, 1.8 points lower than June’s reading and below the expectations of analysts surveyed by MarketWatch. The reading on the University of Michigan’s final July consumer sentiment index was better – 85.1, up a full point from June to its highest level since July 2007.6,7

Prices increased in June, but it seemed more an anomaly than a trend. The Consumer Price Index rose 0.5%, but a 6.3% leap in gas prices was a major factor; the core CPI was up just 0.2%, and annualized core inflation had increased just 1.6%, the smallest amount in two years. Wholesale prices jumped 0.8% in June, though the core Producer Price Index only advanced 0.2%. Retail sales were up o.4% in June; there was a 1.8% gain in auto purchases and a 2.4% improvement in furniture sales. 8,9,10

In early July, the Obama administration decided to postpone the Affordable Care Act’s employer health insurance mandate for a year. Businesses with 50 or more full-time employees won’t have to provide health insurance to workers until 2015; retail franchises and restaurant owners welcomed that decision. The move raised big-picture questions about whether all aspects of the ACA 9such as the coming online health insurance exchanges) could be implemented on schedule. In mid-July, Federal Reserve chairman Ben Bernanke cited the need for a “highly accommodative monetary policy for the foreseeable future,” buoying financial markets. The central bank’s July 31 policy statement offered no hint as to when it would start to reduce its asset purchases, and it termed the current economic expansion “modest”, which seemed slightly less enthusiastic than its “moderate” assessment from June. 11,12,13,*,**

GLOBAL ECONOMIC HEALTH

Two closely-watched China manufacturing PMIs offered different estimates of the performance of the world’s biggest economic engine. The HSBC PMI came in at just 47.7 for July. The “official” PMI from China’s National Bureau of Statistics (which, incidentally, surveys a greater percentage of state-owned enterprises) rose 0.2 for July, showing a bit of expansion at 50.3. Still, this was nothing special. Neither was India’s July Markit manufacturing PMI reading of 50.1; Markit manufacturing PMIs for South Korea, Vietnam, Australia and Taiwan were all under 50 last month, with Australia’s dropping 7.6 points. HSBC and Markit service sector PMIs tracking Asian economies also moved lower in July; India’s showed contraction for the first time in 21 months at 47.9, and those for Japan (50.6) and China (51.3) showed slower growth.14,15

As mounting evidence of a slowdown came from Asia, another question emerged in Europe. Was the Eurozone recession coming to a close? The EU manufacturing sector grew in July for the first time since 2010 – the Markit PMI hit 50.5, up from 48.7 in June. Germany’s manufacturing PMI reached a 5-month peak of 52.1, France’s hit a 17-month high of 49.1, and Italy’s reached a 26-month high of 49.7. July also saw the fewest eurozone job losses in 16 months, and the German economy saw a net job gain.14,15,16

WORLD MARKETS

Big gains were the order of the month, especially in Europe. The FTSE 100 climbed 6.53%, the DAX 3.98%, the CAC 40 6.79%, the RTSI 2.97% and the STOXX 600 5.11%. In the Asia Pacific region, some losses crept in among the gains: the Sensex slipped 0.26% and the Nikkei 225 0.07%, but that was overshadowed by advances for the KOSPI (2.72%), the KSE 100 (10.98%), the Hang Seng (5.19), the Shanghai Composite (0.74%) and the Asia Dow (1.17%). On our side of the pond, the TSX Composite rose 2.95%, the MERVAL 12.82% and the Bovespa 1.64%.The Global Dow advanced 5.87% in July, the MSCI World Index 5.19% and the MSCI Emerging Markets Index 0.77%.1,17,***

COMMODITIES MARKETS

The price of NYMEX crude soared 9.15% in July. That put oil at $105.03 a barrel at the end of the month. Natural gas prices, on the other hand, descended 3.25%. Gold settled at $1,313.00 at month’s end, the culmination of a 7.46% monthly ascent. Silver went +1.45%, platinum +6.77% and copper +2.40%. As for crops, coffee lost 1.37%, but cocoa rose 4.74%, wheat 2.71% and sugar 2.48%. The U.S. Dollar Index lost 1.76% for the month.18,19,****

REAL ESTATE

On August 1, Freddie Mac’s Primary Mortgage Market Survey had the average rate on a 30-year fixed home loan at 4.39%, up from 4.29% on July 3 and 3.81% on May 30.20

Existing home sales fell 1.2% in June, with tightening inventory being a factor; still, the National Association of Realtors reported a 13.5% yearly improvement in the median sale price. The May S&P/Case-Shiller Home Price Index recorded a 12.2% overall yearly rise in home prices across 20 cities. New home sales were up 8.3% in June, with a 38.1% year-over-year increase in the sales pace (the best on record since 1992).6,21

Not all the news was so impressive. Pending home sales dipped 0.4% for June, partly reflecting the shrinking inventory of existing properties on the market. As for building permits and housing starts, they both fell in June: building permits sagged 7.5% from May but were up 16.1% annually, while starts dipped 9.9% but were still up 10.4% in 12 months.6,22

The 0.58% rise in conventional mortgage rates across two months was mirrored by other types of home loans. Average rates for 15-year FRMs went from 2.98% to 3.43%; average rates for 5/1-year ARMs and 1-year ARMs were but 2.66% and 2.54% on May 30, yet respectively 3.18% and 2.64% by August 1.20

LOOKING BACK…LOOKING FORWARD

To broadly recap, July ended with the DJIA settling at 15,499.54, the NASDAQ at 3,626.37, the S&P 500 at 1,685.73 and the Russell 2000 at 1,045.26 (it rose 6.93% for the month). Fear ebbed: the CBOE VIX fell 20.23% for the month, settling at 13.45 on July 31.1

% CHANGE

YTD

1-MO CHG

1-YR CHG

10-YR AVG

DJIA

+18.28

+3.96

+19.15

+6.79

NASDAQ

+20.10

+6.56

+23.37

+10.90

S&P 500

+18.20

+4.95

+22.21

+7.02

REAL YIELD

6/28 RATE

1 YR AGO

5 YRS AGO

10 YRS AGO

10 YR TIPS

0.38%

-0.69%

1.65%

2.41%

Sources: online.wsj.com, bigcharts.com, treasury.gov – 7/31/131,23,24

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

Basically, U.S. stocks just achieved about two years of gains in seven months. This begs a question: how much higher can the S&P 500 climb this year? When 2013 started, especially bullish analysts thought the index might hit 1,700 before 2014 arrived. At the start of August, it was already at that level. When the market is this hot, warnings of a pullback or a correction reliably appear – and they certainly have, but few investors seem to be paying much notice to them. With luck, 2013 could wind up a truly exceptional year for Wall Street – a year of exceptional gains, aided by an exceptional stimulus, sustained by exceptional confidence. Fall is not far away; how much more upside could this market have? Could the S&P gain another 2-3% by year’s end? Another 6-7%? Or will unforeseen disturbances and the Fed’s gradual exit from the bond market invite struggles? So far, this bull market has passed a number of significant tests; if it continues to do so, 2013 will be remembered as a tremendous year for the stock market investor.

UPCOMING ECONOMIC RELEASES:

For the rest of August, here is how the schedule of news items plays out: June wholesale inventories (8/10), July retail sales and June business inventories (8/13), July’s PPI (8/14), July’s CPI, July industrial output and the August NAHB housing market index (8/15), July’s housing starts and building permits plus the University of Michigan’s initial August consumer sentiment index (8/16), July existing home sales and the July 31 Fed policy meeting minutes (8/21), the Conference Board’s July index of leading indicators and the June FHFA housing price index (8/22), July new home sales (8/23), July hard goods orders (8/26), June’s Case-Shiller home price index and the Conference Board’s August consumer confidence survey (8/27), July pending home sales (8/28), the second estimate of Q2 GDP (8/29), and the final August University of Michigan consumer sentiment index and the July consumer spending report (8/30). The Labor Department issues the July jobs report on September 6.

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Disclosure

* Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

** The Institute for Supply Management (ISM) index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

*** Investing in foreign securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

**** Fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.

The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.

NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services.

The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade.

The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange.

The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. Moscow Exchange is the largest stock exchange in Russia, located in Moscow, trading equities, bonds, derivatives and currencies. It was officially established on 19 December 2011 through the merger of the two largest Moscow-based stock exchanges, the Moscow Interbank Currency Exchange and the Russian Trading System.

The Dow Jones STOXX 600 Index captures more than 90% of the aggregate market cap of European-based companies.

Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks.

The KOSPI Index is a capitalization-weighted index of all common shares on the Korean Stock Exchanges.

The Karachi Stock Exchange (KSE) is Pakistan’s largest and one of the oldest stock exchanges in South Asia by market capitalization.

The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong.

The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.

The Asia Dow measures the Asia equity markets by tracking 30 leading blue-chip companies in the region.

The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization.

The price-weighted MERVAL Index (MERcado de VALores, literally Stock Exchange) is the most important index of the Buenos Aires Stock Exchange.

The Bovespa Index is a gross total return index weighted by traded volume & is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange.

The Global Dow is a 150-stock index of corporations from around the world created by Dow Jones & Company.

The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets.

The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies.

Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices.

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